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Equity Crowdfunding: Caveat Emptor? A Guide For Investors

Changes to regulations in the UK have made it easier for investors to back new start-ups through crowd-funding platforms and potentially reap returns through equity shares.

The Financial Conduct Authority (FCA) changed rules regarding who can buy shares of equity in a new start-up as part of its move to issue further guidance while opening up the investment market to more consumers and introduced rules on peer-to-peer lending crowd-funding platforms. Donation- or reward-based platforms (such as Kickstarter) remain unregulated as the FCA felt they fell outside its remit.

Previously only high net-worth individuals, sophisticated investors (those with investing knowledge and experience) or investors with certified investors could purchase equity in an unlisted company.

Finance (Photo credit: ChodHound)

As of April 1, 2014, any person can invest, but must keep each of their first two investments under 10% of their net assets (money that does not affect their house, pension, or life insurance).

After this, the investor can choose to self-certify as a sophisticated investor and put up as much money as they desire, says a spokesperson for the FCA.

“What the government is looking at doing is opening up or de-regulating crowd-funding so savers, people who put money into banks, can have a better rate of return,” says Darren Jordan, partner at Kingston Smith, an accountancy firm. “Currently if you put your money in the bank you may only get 1% per year. If you can put it straight into businesses, or peer-to-peer loans for businesses, you could quite easily get 1% per month instead of per year. It’s the government recognising that there are consumers looking for new ways to capitalise on savings.”

The crowd-funding market is small, but growing rapidly. Equity crowd-funding generated £28 million ($47 million) last year, an increase of around 600% compared to 2012, according to the FCA.

The market could eventually see as much as £31.4 billion ($52.9 billion) invested, according to a survey and analysis done by Volpit, an equity crowd-funding platform. A survey of 1,000 adults found that although 88% were unaware of the legislative changes that now meant they could partake in equity crowd-funding, 39% were interested in investing a minimum of £500 ($841.50) and 29% were interested in investing over £1,500 ($2,524).

Volpit extrapolated this out over the adult employed population of the UK to arrive at the £31.4 billion ($52.9 billion) figure.

“It’s still similar types of people that will be attracted to investing in equity crowd-funding,” agrees Luke Lang, co-founder of Crowdcube, which calls itself the oldest and biggest UK equity crowd-funding site. “They’d need to managed their own investments and be interested in supporting businesses to fit with the strategy going forward.”

But that does not mean that equity crowd-funding is something that investors interested in start-ups should ignore or that the regulations have not opened up the equity crowd-funding market to a bigger crowd.

A large chunk of Crowdcube’s estimated 70,000 users would fit into the high net-worth or sophisticated investor categories. But many would not have got involved before crowd-funding platforms started to develop.

“Many investors would still be working or have other commitments and wouldn’t necessarily have the time to devote to it,” says Lang. Crowd-funding platforms have made it easier for these investors to participate without the full time commitment that many traditional angel investor networks would require.

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